Financial Development, Income Inequality and Governance Institutions

Abstract

The paper investigates empirically how governance institutions mediate the link between financial development and inequality. To this aim, we assemble a dataset of 48 middle-and high-income countries for the period 1996-2014. Results, obtained by means of instrumental variables dynamic panel data models, reveal that financial development is pro-inequality; however, the strength of the relationship is attenuated in contexts with stricter control of corruption, better regulatory quality, political stability and rule of law. Institutional domains less directly related to the market economy – political voice and accountability and government effectiveness – do not play any mediating role.